Hong Kong delves into the drafting of guidelines following the approval of stablecoin legislation
Hong Kong Establishes Comprehensive Regulatory Framework for Stablecoins
Last week, Hong Kong enacted legislation supporting the issuance of stablecoins, establishing a robust regulatory framework that sets high standards for reserve requirements, anti-money laundering (AML) procedures, capital requirements, and regulatory oversight by the Hong Kong Monetary Authority (HKMA).
Reserve Requirements
Stablecoin issuers in Hong Kong must fully back all outstanding stablecoins with high-quality, liquid reserve assets. These reserves, held in segregated accounts, must be protected under statutory trust or custodial arrangements with reputable financial institutions. The reserves must be denominated appropriately (e.g., Hong Kong dollars for HKD-pegged stablecoins) and meet strict liquidity criteria to enable prompt redemption. Ongoing reconciliation, daily reporting to the HKMA, weekly reserve summaries, regular independent third-party audits, and public disclosures are mandatory.
While the rule regarding the backing assets for stablecoins is relaxed for the Hong Kong Dollar (HKD) given its peg to the US dollar, allowing US dollar assets for a HKD stablecoin, the HKMA has the latitude to approve other types of assets for the reserves that back a stablecoin. Overnight repo and money market funds that invest in the same assets are also acceptable.
Anti-Money Laundering (AML) Procedures
The Ordinance enforces enhanced AML and counter-terrorist financing (CTF) standards, requiring licensees to implement robust customer due diligence measures, particularly for unhosted wallets and cross-border transactions. Stablecoin issuers must develop detailed AML/CFT compliance frameworks, including internal controls, staff fit-and-proper requirements, and board-level oversight.
Capital Requirements and Governance
Stablecoin issuers must have a minimum of HKD 25 million in capital or an equivalent amount in another currency, but the regulator can specify a higher figure. These issuers are expected to perform due diligence on frequent counterparties or individuals conducting occasional transactions involving an amount equal to or above $8,000.
The regime imposes governance and prudential safeguards similar to banks. Issuers must demonstrate sound governance with board-level oversight, independent audit functions, and comprehensive internal controls covering financial and operational risks, including cyber risk and operational resilience. While explicit capital adequacy metrics akin to traditional banks are not detailed in public summaries, these controls aim to secure financial stability and operational integrity of stablecoin issuers.
Regulatory Oversight by HKMA
The HKMA licenses stablecoin issuers and supervises their activities, including ongoing compliance with reserve, AML, and governance requirements. The HKMA can designate additional regulated stablecoin activities post-consultation with the financial secretary. Licensed issuers must provide frequent reporting and are subject to supervisory guidelines issued by the HKMA, emphasizing transparency, risk management, and consumer protection.
Marketing incentives are allowed for stablecoin issuers in Hong Kong, but they are not allowed to pay interest to stablecoin holders. On a daily basis, stablecoin issuers must publish figures about the issuance and reserves and report to the regulator on a weekly basis. The frequency of attestations and audits for stablecoin issuers is determined by the HKMA.
The HKMA's regulatory approach aligns with international standards and positions Hong Kong as a jurisdiction with bank-level prudential oversight on stablecoin activities. The requirements for stablecoin issuance in Hong Kong are more relaxed than some other jurisdictions, such as Singapore and the draft US GENIUS Act legislation, in terms of maturity for securities.
The publication of daily figures and weekly reports, attestations, audits, and minimum capital requirements are not applicable to banks in Hong Kong. Responses to the consultation are required by the end of June.
- The regulatory framework for stablecoins in Hong Kong requires issuers to fully back all stablecoins with high-quality, liquid reserve assets that are denominated appropriately and meet strict liquidity criteria.
- In line with enhanced anti-money laundering (AML) and counter-terrorist financing (CTF) standards, stablecoin issuers in Hong Kong must develop detailed AML/CFT compliance frameworks and implement robust customer due diligence measures.
- Stablecoin issuers in Hong Kong are subject to capital requirements, with a minimum capital requirement of HKD 25 million, but the regulator can specify a higher figure for specific issuers.
- The Hong Kong Monetary Authority (HKMA) not only licenses stablecoin issuers but also supervises their activities, ensuring compliance with various reserve, AML, and governance requirements.
- The regulatory approach in Hong Kong for stablecoins aligns with international standards, positioning it as a jurisdiction with bank-level prudential oversight on stablecoin activities, which could potentially attract businesses and technological innovations in the finance industry.
